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Server revenues decline in the third quarter

EMEA taking it especially hard, says Gartner

The server racket continues to be impacted by issues throughout the global economy and intense competition between incumbent players, upstarts, and those making their own hyperscale boxes.

Shipment growth is anemic, revenues were down, and it is very likely that profits were down even further, according to the latest data.

In the quarter ended in September, the box counters at Gartner think that server makers pushed out 2.46 million boxes, an increase of 3.6 per cent compared to the year ago period. But revenues actually fell by 2.8 per cent, to $12.6bn, during the three months.

Not only is competition a factor, but all of the major RISC and Itanium vendors were in product transitions in the quarter and so was IBM with its System z mainframes. New generations of Power, Itanium, and Sparc processors are in various stages of introduction into the market, and that is no doubt holding many customers of Unix and proprietary operating systems back a little.

The dominating x86 server platform certainly did better than the market at large, with revenues up 4.3 per cent, to $9.37bn, and shipments across all vendors, all machine types, and all form factors up 4 per cent, 2.43 million machines.

Despite all of the woes Hewlett-Packard has heaped upon itself in recent years, it nonetheless remains the number one supplier of x86 iron, with its ProLiant, Scalable Systems, and BladeSystem lines driving $2.84bn in revenues against 629,312 shipments. That said, HP is bleeding market share like a stuck pig, with revenues down 9.3 per cent and shipments down 8 per cent. This cannot continue forever if HP is to maintain its position.

Dell, once again, was able to grow its x86 server business in the quarter, driven mostly by PowerEdge commercial boxes but also helped by bespoke machines ginned up by its Data Center Solutions unit. Gartner reckons that Dell's x86 server shipments rose by 9 per cent to 564,524 boxes, and sales were up an even faster 10.3 per cent to $2.1bn.

IBM is losing x86 server market share as well, with sales down 5 per cent to $1.42bn and shipments off 1.4 per cent to 264,524. Fujitsu maintained its number four position in the x86 server market, even with shipments down 3.8 per cent to a pretty small 74,870 boxes, which drove $364m in revenues.

That was the number five revenue position, by the way, and server upstart Cisco Systems pushed out 55,973 blade and rack servers in the quarter, giving it the number five position in shipments, but generating $419.9m in revenues, and giving it the number four position in shipments. Cisco grew shipments by 40.4 per cent and sales by 56.5 per cent in the third quarter. At this rate, in two years, IBM will be looking weak, particularly since Cisco has made inroads against IBM to get its server sales.

Other vendors accounted for 836,134 machines in the x86 server space, which drove $2.23bn in sales. A little less than a quarter of the market is still not driven by the top five vendors; that now includes Oracle as well as Lenovo, Dawning, Hitachi, NEC, Bull, Silicon Graphics, Cray, Super Micro, and others who do a decent amount of business.

Gartner dices and slices the server racket in a million ways, but it only gives away a few wedges of data. Each quarter in addition to talking about the x86 part of the server space, it also breaks out the RISC/Itanium server market for machines running a variant of the Unix operating system.

At the turn of the millennium, these Unix boxes dominated server revenues and Hewlett-Packard and Sun Microsystems were on top and IBM was the upstart. Now HP has declined massively, Sun has been eaten by Oracle and shrunk to drive profits, and IBM absolutely dominates Unix.

The trouble is, the Unix market no longer includes workstations (which used to help carry the cost of Unix server development) and the Unix server business is slightly smaller than it was in late 2000, when it peaked at nearly half of overall server revenues, and Linux and Windows systems now generate the bulk of system sales. IBM has a much bigger share of a pie that is not growing – and very likely will not grow much ever again.

In the quarter, Unix machines accounted for just over $2bn in sales, falling 16.4 per cent. IBM is in the middle of the Power7+ transition and only fell 2 per cent, which is a bit of a miracle on first glance but it might mean IBM pushed out Power7 machines at deep discounts to keep sales up. If that is the case, then future Power7+ system sales will be adversely affected. We will know in a few quarters.

HP was the number two Unix system supplier in the quarter, with $387.5m in revenues, but sales were off 28.2 per cent. Oracle makes jabs at HP all the time – sometimes in the courts – but it is doing no better on the Unix front, with revenues off 35.5 per cent to $354.8m. Some of that decline is Oracle walking away from unprofitable system sales, but some of it is also losing deals to IBM. Fujitsu's Solaris server biz was down 23.2 per cent to a piddling $50m in the quarter.

Add it all up, and IBM was the top server dog in the September quarter, despite the System z12 mainframe ramp and the Power7+ transition, with $3.48bn in sales (down 9.5 per cent). HP ranked second with $3.33bn (down 12.4 per cent), followed by Dell with its $2.1bn (up 10.3 per cent), Oracle with its $592m (down 22.5 per cent) and Fujitsu with its $494.1m (down 18.3 per cent). Cisco came in sixth, and this time next year, unless Fujitsu does something, it is hard to imagine Cisco not permanently taking the number five spot permanently.

Europe is certainly not helping any of the server makers. Gartner figures that EMEA had $2.96bn in total server sales in the third quarter, down 9 per cent, with shipments of 598,800 machines, off 2.8 per cent.

Oddly enough, even x86 server revenues were down in Europe, with Dell once again bucking the trend. HP is so far out in front of IBM and Dell on the revenue front that it can decline for years and still maintain the number one server revenue position. But if it does, three more HP CEOs will lose their jobs.

The prognosis for Europe in terms of server sales is more of the same.

"The outlook for the fourth quarter in EMEA looks similar to what we have witnessed in the year so far, with constraints on demand limiting the market opportunity," explained Adrian O'Connell, a research director at Gartner who tracks the EMEA market, in a statement.

"Vendors are under constant pressure to deliver the most effective execution. With limited overall demand, they will have to consider competitive migrations as their best opportunities for growth and market share gains. This year's fourth quarter might not be an especially festive period for every server vendor."

Looks like a fine time to have a drink. Or three. Good beer is better than cheap wine every time – and costs about the same. Keep that in mind. ®